Measure the true annualized return on a real estate investment
After all expenses, mortgage, and vacancy
Agent commission + closing costs (typically 6-8%)
The Internal Rate of Return (IRR) is the annualized rate of return that makes the Net Present Value (NPV) of all cash flows equal to zero. In plain English: it's the true annual return on your investment when you factor in the timing of every dollar in and out.
Simple ROI ignores the time value of money. A property that returns 50% over 5 years is very different from one that returns 50% over 20 years. IRR captures this difference by discounting future cash flows back to present value.
For residential rental properties, target an IRR of 12-20%. Core/stabilized properties might have IRRs of 8-12%. Value-add deals aim for 15-25%. Development projects should exceed 20% to justify the risk. If your IRR is below 8%, you may be better off investing in index funds.
1. Cash flow: Monthly rent minus expenses. 2. Principal paydown: Tenants paying down your mortgage. 3. Appreciation: Property value increase over time. 4. Tax benefits: Depreciation and deductions. IRR captures all four, making it the gold standard for real estate analysis.
Ask John to run the numbers on any property — he'll calculate IRR, cap rate, and tell you if it's worth your time.
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